Post written by Donald Swartz, President and Principal at Swartz + Associates, Inc. | Lover of Chiefs, Royals and golf | Avid “Cruiser” | Poker Enthusiast
A few weeks ago, I experienced my first trip underground in a coal mine. Wow, what an experience. After less than two hours underground, my back hurt, my ears were ringing and I’d had enough time to understand the process and call it a day. Being hunched over with a hard hat balanced on my head was quite an ordeal for the uninitiated. I can’t imagine being over 6 feet tall and doing this every day, 8 hours/day, 5 days/week.
“Ok, Don, so why were you in a coal mine in the first place?”
Such is the life we lead in the review of property taxation. In cases like this, clients have engaged us to ensure they’re only paying their fair share of annual property taxes on the machinery and equipment they use. This is based upon the fair market value of the equipment (if you haven’t noticed, the coal industry isn’t exactly clicking on all cylinders.)
With large decreases in coal output, mining entities are experiencing significant drops in both production and revenue. Assets are being idled, the secondary market for used equipment is scarce at best, and the increase of alternative fuel sources are currently making coal an unattractive option in the marketplace.
The county’s task is to determine the fair market value of assets for property tax purposes. Several states allow taxpayers to provide information to support an opinion of value that may be different than a singular method employed currently. Our role is to explore and identify other valuation techniques to determine fair market value. In the coal industry, it would appear the argument of economic obsolescence warrants consideration.
Economic obsolescence is a form of depreciation applied to an asset that reduces the value based upon external factors unrelated to the asset itself.
As an example, in the coal industry the taxpayer may own several pieces of mining equipment such as continuous miners, loaders, haulers, conveyors, etc. The assets depreciate over time and may lose value based upon their age, condition and normal wear and tear. However, if economic factors dictate a change in the use of the equipment, economic obsolescence can be considered.
In this case, the assets may be working fine but, due to a lack of demand of coal in the marketplace, the assets aren’t being used as intended. They may be used at a significantly reduced capacity or they may be idled completely. External forces have caused inutility of assets and economic obsolescence can then be measured and applied to determine the fair market value of the equipment.
Keep this in mind as you think about your own assets, whether they’re real estate holdings or business machinery and equipment. Are there factors in the economy that are hurting or helping your business? If so, are they short term or long term issues? Whatever the case, these are concepts owners of property and equipment must consider when assessing their annual property tax liability.